Weigh three corn marketing options
Feb 18, 2004 12:00 PM, By Paul L. Hollis Farm Press Editorial Staff
There are three basic marketing alternatives for corn — you can do nothing and wait, you can fix a price now, or you can set a floor in the market now.
“What are the risks if you do nothing now?” asks George Shumaker, University of Georgia Extension economist. “If we wait to sell at harvest, we could average about 4 cents under the annual average price, based on historical data. On $3 corn, that's 12 cents under the yearly average.
“If we sell corn now, at 18 cents above the yearly average, the difference between the value of the corn we sell now and the value of the corn we sell at harvest is about 30 cents, and that could make a big difference in our profit margins.”
Futures market prices change throughout the year, says Shumaker. Looking at data from 1997-2002, prices in January, February and March averaged about 106 percent of the annual average price, he says.
“On $3 corn, that's about 18 cents more than the yearly average. If I'm a gambling man, I want to gamble with the odds in my favor, and the odds are that we'll see better corn prices early in the year,” he says.
Growers considering storing corn should view it as an enterprise separate from corn production, he says. “We put corn in the bin in anticipation of making a profit from that enterprise. You enter into that enterprise only if you feel you can make money from it. We need to see a price increase large enough to cover the cost of holding corn,” he says.
In estimating the cost of storing corn, Shumaker says shrinkage and drying account for about 2 percent of the value of the crop. Management, or the time required to maintain the crop in storage, accounts for about 1 percent of the corn's value, he says.
“Stored corn represents a non-liquid asset in that we don't have the use of the value of that asset while it's in storage. Therefore, there's an interest cost, and we'll estimate that at about 1 percent per month. Other factors, including loss of quality, account for another 1 percent of value,” he says.
Added together, the cost of storing corn is estimated at about 8 to 9 cents per bushel, says Shumaker. “Whenever I put corn into the bin, I want to see if the market is willing to pay me for storage.”
You can get an idea of what the market is willing to pay for storing corn by looking at the differences in the monthly futures contracts, he says.
“The difference in the futures is the amount the market is willing to pay for carrying that commodity for another couple of months. If you carry from the March to the May contracts, they're willing to pay 4 cents. If you carry the crop until July, they're willing to pay an additional 3 cents for a total of 7 cents. So it may be June or July before the market is willing to pay you for one month of storage.”
Looking at data from the past 10 years, Shumaker says the futures market — from the first of September through March — hasn't risen, on average.
“So perhaps storing corn isn't such a good idea. But we have something going on here in the Southeast that makes storage a more attractive option, and that is the increase in our cash price relative to the futures.”
Georgia corn growers, he says, produce about 1/12 of the corn consumed in the state. This means that 11/12 must come from someplace else, he adds.
Most of the corn, he says, comes from Indiana, Ohio and Michigan. “We entice people to bring corn down here by having a local cash price that is higher than the local cash price where the corn is obtained. It has to be enough to cover the cost of transportation.
“If the basis in central Indiana is 20 cents under and our basis is 30 cents over, how much is the market willing to pay to bring corn from Indiana to southwest Georgia? It takes 45 to 50 cents per bushel to bring that corn into Georgia. Our basis or low cash prices won't get much above 35 to 40 cents over the futures, and you can buy corn up there for 10 to 15 cents under. We have a positive basis, and that's a strong advantage.”
If you combine the positive basis with the decrease in the futures market, you'll get the average change in cash price beginning at harvest and going out to the different months, says Shumaker.
“On average, we're picking up 25 to 40 cents. On average, over the past 10 years, we've been able to make money from storing corn in Georgia in the short-term. In two or three months, we can net out 10 to 15 cents after storage costs.”
It begins to turn negative in January, says Shumaker, because everyone wants to sell corn to begin the new tax year. “But you pay a price for that strategy. Will the price you receive offset your taxes enough to make it worthwhile?”
With short-term storage, growers should let the basis go up to about 30 cents, he says. “That should be your signal to let the corn go, cut your costs of holding it, and make a positive return.”
There are two options strategies in corn marketing for the coming year, says Shumaker. “You can go out right now and buy a put. At $2.70, it'll cost you about 20 cents. So, I can lock a floor in the futures of $2.70 minus 20 cents, meaning that I'll take home no less than $2.50.”
The second strategy for using options on the 2004 crop is to sign a forward contract, he says. “You can get a good basis for harvest delivery if you lock it in now. It they are willing to offer you a strong basis at harvest, go ahead and sign a cash contract. You've locked in that price, but you don't want to miss a rally if one should come.
“So turn around and buy a call option. At a $2.70 futures market, it will cost you about 18 cents, or about the same as a put option. That will lock you in that $2.70 cash price minus your option premium for a floor of about $2.50.”
e-mail: phollis@primediabusiness.com
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